A Tanzania viewpoint on resolving boardroom conflicts

Sunday June 23 2019



PAUL KIBUUKA

paul.kibuuka@isidoralaw.co.tz

PAUL KIBUUKA paul.kibuuka@isidoralaw.co.tz 

There can be surely not a scintilla of doubt that the Dar Choral Society and Orchestra knows how to satisfy the port city’s classical music fans, including yours truly.

According to the Cambridge English Dictionary, an orchestra is a group of musicians who play many different instruments together and are led by a conductor. They play as soloists, in small groups, and all together, produce a beautiful sound.

A board of directors is like an orchestra. Each director acts as a soloist, but also cooperatively works with other directors as a group that is proficient at making decisions in the best interests of the company.

All directors bring their own competencies; indeed, Tanzania’s Companies Act, 2002 (CA 2002), requires every director to exercise reasonable care, diligence and skill in discharging their duties. In spite of this, directors must work as part of a bigger team to ensure the long-term interests of the company are attained.

It is not phenomenal that, from a legal standpoint, a good corporate lawyer is engaged to advise a company in financial distress on remedying the situation through restructuring that the lawyer discovers that there is aggravated tension (conflict) in the board of directors.

According to Joyce L. Hocker and William Wilmot, authors of Interpersonal Conflict, a conflict is “an expressed struggle between at least two independent parties who perceive incompatible goals, scarce resources, and interference from others in achieving their goals”.

But peradventure, you’d expect that given the tight liquidity situation in the Tanzanian banking system there should be conflicts respecting financial and strategic board decisions, especially in times of falling profitability, lower return on investment or loss of market share.

An effective turnaround strategy depends on a systematic examination of the root causes of failure and entails working through and with others, including the board, stakeholders and staff.

A build of emotions and conflict in the board has the potential to cripple a company; however, a mostly perplexing issue concerns the consequences of conflict on the board’s role in implementing a turnaround strategy.

So, within this framework, what are the mechanisms that can be employed to resolve conflicts in the boardroom?

Although every company, and every boardroom conflict, is probably different, mechanisms exist for resolving conflicts in a way that is acceptable and appropriate for all directors.

Directors are subject to statutory duties specified in the CA 2002, however, as a general rule they are not required to obtain consent of the shareholders on everyday management of the company and its business.

Where all the shareholders sit on the board this may not be an issue. But shareholders who don’t sit on the board may prefer to be consulted and/or have the right to sanction key decisions about business activities and management.

An appropriately crafted shareholders’ agreement, which, together with a company’s articles of association, creates internal rules by which the company is governed, can be used to stipulate the decisions that can be reached by directors and the decisions which require the consent of shareholders.

Moreover, a shareholders’ agreement can be used to specify the instances that necessitate directors to bring up issues to shareholders; for example, when there is a disagreement amongst the directors.

Deadlock situations between two directors who each own 50 per cent of the shares are likely to prove the most difficult to resolve.

A shareholders’ agreement at times incorporates deadlock resolution clauses requiring the use of commercially reasonable efforts to resolve any deadlock in line with an agreed procedure and timeframe and, if the deadlock cannot be resolved within the agreed timeframe, provide a mechanism for one shareholder compulsorily buying the other shareholder’s stake in the company.

Beyond this, mediation, negotiating and compromise can help to manage most conflicts and reach a resolution that is acceptable for all directors, who may also be serving in other roles e.g. as employees, shareholders, creditors, or guarantors.

The courts of Tanzania also provide a valuable backstop, but it is important to demonstrate that alternative dispute resolution mechanisms have been fully explored and exploited prior to seeking court intervention.

Paul Kibuuka is the managing partner of Isidora & Company Advocates. Email: paul.kibuuka@isidoralaw.co.tz Twitter: @tzpaulkibuuka